The novel corona virus Covid-19 which appeared first in Wuhan, China in December 2019 has spread all over the world in less than three months. The rapidity with which it spread is stunning. It has already infected over 2.8 million people and killed nearly 0.2 million. There is no antidote or vaccine for this virulent virus. The fear of infection and possible death has disrupted life and livelihood in a major way all over the world. Isolation, quarantine and lockdowns of vast areas have become commonplace in a bid to contain the virus. Governments have been forced to institute various fiscal, as well as monetary, measures to address the health and economic issues posed by the pandemic.
The virus started spreading in Bangladesh from mid-March. Lockdowns were soon initiated in a bid to halt the spread of the virus. Much of the economy came to a standstill resulting in an unprecedented economic crisis. To meet the incipient challenge the government rolled out its first assistance package on March 25 to minimise the trade impact of the Covid-19 crisis. It was meant to assist only the exporters, essentially RMG manufacturers who contribute 85 per cent of the total export of the country. The package involved giving exporting firms wage bill support of TK 50.0 billion in credit at an interest rate of 2.0 per cent implying a subsidy of 7.0 per cent from the market rate of 9.0 percent that was scheduled to come into operation on April 1, 2020.
A large assistance programme of four packages totalling Tk 677.50 billion was announced by the Prime Minister on April 5. The first package of Tk 300.00 billion was meant for the larger business enterprises affected by the crisis. They could access it at an interest rate of 4.5 per cent. The relatively smaller business enterprises will be able to access Tk 200.00 billion in credit at an interest rate of 4.0 per cent. The Export Development Fund (EDF) will be augmented by US$1.50 billion at a reduced interest rate of 2.0 per cent. Finally Import Refinancing Scheme will get Tk 50.0 billion at an interest rate of 7.0 per cent.
A few days later the PM added another Tk 50.0 billion credit package for the agricultural sector at an interest rate of 5.0 per cent. Thus the entire assistance programme amounted to Tk727.50 billion.
The entire credit will be granted and disbursed by commercial banks at the market interest rate of 9.0 per cent. The borrowers, however, will pay interest at reduced rates as prescribed by the government. The banks will be compensated for the differences between these rates and the assumed market rate of 9.0 per cent by the government (presumably through Bangladesh Bank). Thus the subsidy burden of the entire package will be about Tk 40.0 billion which is the only real expense of the government.
The first thing to be noted about the programme is that it comprises essentially of monetary (credit) policy packages unlike the assistance packages declared by countries such as USA, UK, Canada, India etc., those were largely fiscal measures. Although the programme was declared by the head of the government (rather than the head of the central bank as ordinarily the case for a monetary policy measure) it does not involve much government or fiscal spending.
The programme money will be disbursed by the commercial banks from their own resources on the basis of their bank-client relationship, i.e. on the basis of their normal loan processing criteria and not on the special circumstances thrown up by the corona crisis. This ensures that only enterprises in good standing with the banks, and not in serious financial trouble, will get the loans. The successful enterprises are likely to be large and solvent, and those with good contacts with the government or the ruling party. Most of the small firms or firms in difficulty because of the crisis are likely to be sidelined.
In most of the major countries a central focus of the crisis packages is to bolster the health facilities to minimise the impact of the virus on health. This requires sufficient testing facilities, adequate equipment in the hospital ICUs especially ventilators and respirators, and new makeshift hospitals to ensure sufficient beds for any spikes in hospital admissions. The health care workers (as well as workers in some essential services) must also be given training and sufficient Personal Protection Equipment (PPE) in order to avoid getting infected themselves. Provisions must also be made for additional health care workers in the event of excessive number of patients.
The other focus is to save the people and businesses from impoverishment. A large number of people have lost or will lose their livelihood with the closure of their workplaces due to lockdowns enforced by governments to ensure isolation. These people will soon run out of their savings and face the prospect of eviction and starvation. It is essential that the government take emergency measures in order to protect this group of people.
Unfortunately, the packages mentioned above do not address either the health concerns or the livelihood issues, the only concern is the business sector. The stalwarts of the relevant departments of the government and the ruling party have categorically stated that they have adequate arrangements for corona patients. But the plight of patients with corona-like symptoms needing hospital care is well known from media reports. They have been frequently denied entry to the hospitals let alone any testing or treatment. Ironically, the hospitals wasted scarce testing kits on dead patients which they could not get when alive. An alarming statistic is that the death and recovery ratio of the corona affected patients in Bangladesh is well over one when it is only 0.25 for the world. This is a good indicator of the poor state of health care in the country.
The statements by leaders of the government seem to suggest that the existing safety net programmes, with some marginal adjustments, are sufficient to ensure livelihood for every needy person. However, the corona crisis has suddenly created a very large group of needy people who were never in these programmes. They are basically lower-middle income people employed as wage or salaried workers, casual labourers or self employed people such as independent maintenance workers, vendors, hawkers etc. The countrywide lockdown has suddenly robbed them of their income.
A number of non-government organisations and youth groups are in the field distributing food. But the requirement is far greater than what these private groups can provide. They will soon run out of money when donor fatigue sets in and generosity wanes. Only the government has the resources and power to reach everyone and provide them with the means, in cash or in kind, to tide over the pandemic crisis. Since the government itself has imposed the lockdown, albeit forced by an 'act of God', it may be expected to bear the burden of the consequences of its action. Let one crisis not lead to a worse crisis.
The measures taken so far may suggest that the government is treating this crisis as similar to the economic crisis of 2008-09 though much more severe. This would be a fatal mistake. The great recession was caused by some egregious errors and excesses committed by some financial market actors that stressed the entire economy resulting in the failures of many financial institutions and other businesses. But the economy, including the financial sector, was still functional. The solution to the crisis lay in correcting the errors and excesses through various monetary and fiscal measures to put the ailing economy back on track.
The current crisis did not evolve from similar market problems and cannot be addressed by similar policies only. As mentioned earlier, much of the workforce became suddenly unemployed due to the lockdown. Small and self-employed businesses were also robbed of their incomes. These people will remain in this perilous state until the government reopens the economy in a phased and orderly manner. But the government cannot begin the reopening process until the pandemic has been controlled. During this period they have to be sustained by the government through appropriate fiscal measures. Otherwise nature will take its own course. Such a natural solution is likely to be catastrophic in terms of lives, livelihood and governance. The achievements of the past decades could be wiped out in one fell swoop of Covid-19 without an appropriate response from the government.
Unfortunately, the government has so far refrained from taking any serious fiscal measures. The monetary measures are not as useful in the current situation, they could be so when the economy reopens. The wage support envisaged in some credit packages will be given only to firms in operation that have wage bills to settle. But such firms hardly need subsidised credit although free gifts are always an incentive. The fear of infection and the drying up of demand has turned many firms unprofitable or distressed. They are unlikely to get the subsidised credit from banks, and they may not want the credit unless they take a high risk of defaulting. The mode of assistance for them has to be different.
The government has of late declared some small programmes such as 0.5 million tonnes of rice and 0.1 million tonnes of flour for free distribution, greater open market sale of rice at Tk10/kg, and Tk 7.60 billion for helping those who lost livelihood. It also declared some expansion of the safety net facilities which benefits mainly people who are already in the net. These allocations are insignificant relative to the scale of the humanitarian crisis created by the corona crisis. The government needs to provide sustenance for 3-4 months to all those who lost their livelihood running into millions of workers. This cannot be done by monetary policy measures for enterprises which have been closed down, there has to be outright transfers to them as has been done in several countries. The government has to deploy the big guns of fiscal policy to this end.
Sustaining such a large number of people over a prolonged period is a gargantuan task. The government must show some mettle to shoulder this responsibility considering the alternative. The relevant government departments must quickly identify the target group and the methods to reach them. The government will need an additional Tk 300-400 billion (30-40 thousand crore taka) for such a relief package.
Where will such a large sum of money come from? In the current situation the government can raise the money in one of the following three ways: (1) reallocation of budget expenses, (2) money financing, and (3) debt financing. We cannot pretend to do business as usual when we are in the midst of a catastrophic pandemic the like of which the world has not seen in a century. The government must show determination to beat this virus. It should be recognised right away that the goals set in the annual development plan cannot be achieved. There is no urgency to do so either. What is urgent is that we find money to get out of the crisis without major damages. All non-essential new projects in the current and the next annual development plans should be postponed and leakages from the revenue and development budgets should be sealed tight. The postponement of the construction of a bridge or road does not hurt the economy, it simply delays additional benefits. But relief operations funded by this budgetary saving will save numerous lives and livelihood. A well-conceived reallocation of the budget expenses should release several billion taka to be used for relief and recovery purposes.
Money financing has been already resorted to in providing credit support to the business sector. Bangladesh Bank has promptly reduced the cash reserve ratio by a percentage point. Given the current money multiplier of 5.2, this reduction will increase liquidity of the banks sufficiently to finance the packages announced by the PM. Whether more money financing is desirable is a moot point. The principal problem with money financing (printing) is that it tends to set an inflationary spiral in motion. Whether additional money financing will cause significant inflationary pressure has to be worked out by Bangladesh Bank. It is perhaps better not to mine this source too much.
A major source of funding of government expenses is borrowing. There are three reservations to borrowing. The first is that it crowds out private investment and unduly increases the size of the government sector which is supposedly less efficient than the private sector; the second is that excessive debt financing could exert inflationary pressures; and the third is that it pushes up the government debt-GDP ratio, and hence, future debt-servicing liabilities.
These objections lose much force in the current circumstance. Normally, government borrowing from banks pushes up the interest rates, which discourages private investment. Thus private spending is crowded out by government spending financed by borrowing. However, in the current extraordinary circumstance it is doubtful that the private sector will undertake any but the most essential investment, such as depreciation. Thus private investment will in any case fall during and in the wake of the pandemic. Government spending will not crowd out the private sector, rather it will fill in the hole in the aggregate demand caused by falling private investment as well as consumption. The money borrowed by the government will be spent on transfers to the crisis-affected population who will spend it for consumption thus offsetting part of the reduction in aggregate demand caused by their unemployment. The transfers financed by borrowing and other means will serve to stimulate the recessed economy but will not generate inflationary pressures. This also rebuts the argument that debt-financed government spending will cause inflation. The economy is already under a recessionary situation due to the impact of the corona pandemic; what is needed is some stimulus to reinvigorate it to increase income, and additional government spending serves this purpose.
The borrowings by the government will of course raise the government debt-GDP ratio. But this should not alarm the government because the ratio is currently quite low at only 31.0 per cent of GDP and debt servicing liabilities are also correspondingly low at about 2.0 per cent. Two or three percentage point increase in the ratio will not impose an unbearable burden on the government budget. Some discipline in budget spending or rapid economic growth in future can bring down the ratio if the government so decides. But the borrowing now can be used to reduce the suffering of the people during the pandemic.
Bangladesh has entered the worst phase of the pandemic with both infection and death numbers accelerating. Since the health care is grossly inadequate the only safety measure is the lockdown until this phase is over. That is bad news for the economy. In these unprecedented crises the government has to take the responsibility to keep the population safe and healthy, and also reopen the economy. This is no easy task, but the stakes are very high. The fate of the nation depends greatly on the adroitness with which the government navigates through the twin health and economic crises.
M. A. Taslim is Professor of Economics, Independent University Bangladesh.